Saudi Arabia's Draft Income Tax Law - Introduction
On 25 October 2023, the
Zakat, Tax and Customs Authority (ZATCA) of Saudi Arabia unveiled a draft Income Tax Law (ITL) for public consultation, aiming to modernize and align the tax system with international standards.
This draft proposes significant changes, focusing on international and cross-border tax elements.
Here's some more detail on the proposals.
Saudi Sourced Income
The draft ITL introduces provisions targeting indirect share disposals, categorizing resulting gains as Saudi sourced income.
Additionally, income generated from remote services offered to Saudi residents through electronic means falls under Saudi sourced income, signaling a move towards taxing foreign service providers with Saudi clientele.
Permanent Establishment
Beyond conventional Permanent Establishment (PE) rules, the draft ITL introduces a Services PE concept for non-resident entities rendering services in Saudi Arabia for over 30 days within a 12-month period.
However, these taxing rights under the proposed law may be subject to limitations outlined in Double Tax Treaties (DTTs) signed by Saudi Arabia.
Anti-avoidance Measures The draft ITL incorporates anti-tax avoidance measures, including a Principal Purpose Test (PPT) to deny tax benefits from arrangements designed primarily to attain tax advantages.
It also introduces special tax treatment for transactions involving jurisdictions with Preferential Tax Regimes (PTR), potentially impacting expense deductibility and withholding tax rates.
Participation Exemption
An encouraging provision is the proposed Participation Exemption, aiming to exempt qualifying dividends, capital gains, and liquidation proceeds from taxation for KSA shareholders meeting specific criteria.
Notably, exemptions won't apply if the income is tax-exempt in the shareholder's jurisdiction or benefits from a PTR.
Interest Deductibility
Aligning with OECD BEPS Action 4, the draft ITL limits tax deductions for net interest expenses to 30% of the taxpayer's adjusted earnings, aiming to curb excessive interest deductions.
Reinvestment Reserve and Anti-hybrid Rules
A novel reinvestment reserve allows postponing taxation on asset disposal gains if reinvested within two years.
Anti-hybrid rules address tax discrepancies in cross-border financial instruments between related parties, potentially impacting tax deductions.
Withholding Tax
The draft ITL maintains various withholding tax rates, including 5% for dividends and interest payments.
Notably, it proposes a 10% rate for service payments, and a potential 20% rate for payments to jurisdictions with PTRs, highlighting the impact of the recipient's location on withholding tax rates.
Conclusion
Saudi Arabia's proposed ITL represents a significant shift towards tax reform and international alignment.
Its implications for local and international businesses necessitate careful consideration and monitoring of forthcoming changes.
As the consultation progresses, stakeholders must navigate this evolving landscape to capitalize on opportunities while mitigating challenges in the revised tax framework.
If you have any queries about Saudi Arabia's Draft Income Tax Law, or Saudi tax matters more generally, then please get in touch.